DATELINE: July 24, 2009, Chicago
Last November, Boston Globe reporters Frank Phillips and Peter Schworm reported that a Suffolk University trustee’s firm provided lobbying services to the university at a rate of $10,000 per month. Trustees’ Fiscal Ties Roil Suffolk, Conflicts–of-Interest Policy Scrutinized (Nov. 26, 2008). The reporters revealed the related-party transaction in connection with reports that Suffolk University’s President David J. Sargent was the highest paid university president in the nation, receiving a $2.8 million compensation package. The trustee, Robert Crowe, also is a member of the board’s executive committee. According to the Globe, Crowe played a “leading role” in setting Sargent’s compensation. Both the university and the trustee...
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives
Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour. |
denied any connection between the contract with the Crowe’s firm and the decision regarding Sargent’s compensation package.
Crowe defended the lobbying contract with the university, arguing that he did not profit from the work. At the time, Crowe was the chief executive officer of the WolfBlock Public Strategies, the lobbying firm holding the contract. Crowe claimed that the $120,000 rate was half of what other firms would charge. He also noted that his firm had been instrumental in securing federal funds for the university.
Phillips and Schworm also pointed out that the George Regan, the board member charged with defending the Sargent’s pay, also was the “beneficiary of a $366,000 annual contact with the university.” The contract apparently was for public relations services. At the time, Regan told the Globe that he saw no potential conflict, calling the notion “ridiculous.” The Globe also reported that Regan was reconsidering whether he would accept his appointment to the board--raising an issue whether he was ever a board member, as a portion of the Globe story suggested. According to Regan, his decision to reconsider the appointment stemmed from time pressures (he serves on seven or eight boards) rather than the ostensible conflict.
The Globe’s report apparently triggered an investigation by the Massachusetts Attorney General. On July 9, 2009, the attorney general’s office issued a letter to the members of the Suffolk University trustees. The AG began by noting that:
Related party transactions, and conflicts of interest that are implicit in such relationships, are not, in and of themselves, inappropriate.
Somewhat surprisingly, the AG did not evaluate whether the contract with Crowe’s firm was in the university's best interests. Nor did the AG review the underlying contracts. The AG did conclude that the university and/or its trustees did not comply with the university’s longstanding conflicts-of-interest policy—last amended in 1995. The AG also concluded that the policy was in need of revision. Specifically, the AG believed that additional safeguards and more guidance was required regarding related-party transactions. The AG noted that the required disclosures in disclosure forms filed with the AG were inadequate: the forms revealed the related-party transaction, but did not identify the trustee by name.
Probably most troubling from a lawyering standpoint was the absence of any documentation that Crowe’s disclosure statements to the board regarding the conflicts were reviewed by anyone. Nor was there any documentation since 1997 that anyone analyzed or concluded that the related-party transactions with Crowe’s firm were in the best interests of the university.
The AG concluded:
[T]hat while the Transactions may have been and may still be in the best interests of the University, by failing to review and act on the disclosed financial interest, the University has no adequate procedural basis or record upon which to base such a conclusion.
LESSONS: The Suffolk University related-party transactions offer the following lessons:
A. Follow Your Own Procedures. Board should adhere to their bylaws and policies, including the conflicts-of-interest policy. This is particularly sound advice in view of the revised Form 990’s governance questions. A lot of organizations recently have adopted conflicts-of-interest policies that they downloaded from the Web so that they could answer “Yes, we have a conflicts-of-interest policy.” Those organizations will run into trouble with state regulators and the IRS if they don’t read and adhere to the terms of those policies. Violating your own policy is the equivalent of putting your head in the noose.
B. Don’t Act Hurt When You Are Called on Conflicts. Both Crowe and Regan appear to be troubled that they anyone would criticize or question them over the related-party transactions. Sorry, in this day and age, trustees, directors, and officers who are involved in related-party transactions should expect to have those transactions questioned. The disclosures required by the revised Form 990 are only going to increase the level of scrutiny and the number of questions. If you aren’t prepared for the criticism, don’t enter into the transactions. If you do enter into the transactions, make sure that there is contemporaneous and convincing evidence that the board reviewed the transactions and determined that the transactions are in the best interests of the organization. That evidence should include quantitative proof of why the transaction with the related party is better than the alternatives that the board considered.
C. These Were Conflicts. The related-party transactions involving Crowe's and Reagan’s firms were conflicts of interests despite assertions to the contrary. As the Massachusetts AG’s letter points out, conflicts are not necessarily inappropriate, but they must be independently evaluated to determine that the transactions are in the best interests of the nonprofit. To suggest that related-party transactions aren’t conflicts could result in a board failing to examine the transactions. That would be a mistake.
D. Boards Should Regularly Review Previously Approved Related-Party Transactions. One problem with related-party transactions is the complacency that often evolves with the passage of time. The transaction becomes a comfortable shoe, with the result that boards often fail to review the arrangement following initial approval. Whether the board must conduct an annual review is open to question, but probably is advisable. In any event, the board should periodically examine whether the quality of services provided under an ongoing contract continue to be satisfy expectations, whether the fee remains competitive, and whether the services are still required at the specified level. In other words, the board should periodically review whether the related-party transaction continues to be in the best interests of the organization.
E. Boards Should Document Their Deliberations. The AG found inadequate documentation of the board’s deliberations regarding related-party transactions. This finding offers a perfect example of why meeting minutes should be more detailed than is often the case. The Globe article raises a number of questions about whether the transaction with Crowe’s firm was fully disclosed. There would have been no room for those questions had the minutes described the board’s deliberations, assuming the board deliberated.
F. A Good Example of a Frequently Adopted Regulatory Approach. Board members often are worried that regulators will file a lawsuit against board members if there is any evidence that board members breached their duties of care or loyalty. The approach reflected in the Massachusetts AG's letter is a common one. Although AGs can bring lawsuits, they often are more interested in remedial actions that assure improved governance and elimination of deficiencies than obtaining a pound of flesh from the board. That philosophy appears to underlie the Massachusetts AG's letter.
Thanks to Michael Peregrine of McDermott Will & Emery for bringing the Massachusetts AG's letter to our attention.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
| THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good." Copyright 2009, Charity Governance Consulting LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "A Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good" and this web blog. For additional information call 773-325-2124 |
